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The street economics of induced demand

There’s a lot of misinformation out there about induced demand, a widely established city planning model that attempts to explain why cities tend to maintain a steady state of congestion. I’ll go into some more detail on the theory of induced demand later, but I wanted to start with the economic model.

Auto transportation marketThe amount that people drive is determined by market forces of supply and demand. Consumer preferences about driving are provided by the demand function, which shows that drivers choose to drive less as the cost of driving increases. Conversely, the supply function is a representation of the existing stock of roadways. In this case, the cost of auto travel is congestion.

Model AssumptionsThe principle assumption is that the primary variable cost of auto travel is the time it takes to get from point A to point B, which is reasonable since the fixed cost of owning a car far outweighs the cost of gas for a majority of consumers. (Consider a worker who makes $15 an hour full time. An increase in average commute times by 12 minutes per day decreases his income by $750 a year—the equivalent of a 2.5 percent pay cut.) Even so, the price of gas does factor into people’s driving decisions, so we have to assume that the price of gas is constant. Furthermore, we assume that consumers’ driving preferences are constant. (More on this assumption later.)

Mechanics
The most common justification cited for building a new roadway is to reduce congestion, which makes sense. Most localities will commission a traffic study, which frequently assume constant growth of drivers and therefore also congestion.

Induced demand shows a different story, however. According to our model, the increase in the stock of roadways shifts the supply curve out, which does, in fact, reduce congestion in the short term, but, not as much as it would were there not growth in the number of vehicle miles traveled. Since the cost of driving is reduced, drivers both make longer and more frequent trips in the short term. As we can see from our graph, the number of vehicle miles traveled increases from q1 to q2.

In the long term, the reduced congestion encourages the construction of less dense housing developments far from the city center. With the new roadway, commuters can live farther from their places of work and leisure at the same cost. Over time, these developments shift the demand curve out, reducing the gains against congestion and further increasing the number of vehicle miles traveled.

The effect on cities
The auto transportation market explains the intuition that building more freeways makes a city more car-dependent and encourages sprawl. In very many documented cases (which I will summarize on Friday), building a new roadway does not reduce congestion for very long. Cities that invest in auto infrastructure do not see improvement in congestion.

What traffic engineers assume
According to Jeff Speck in Walkable City (which I’m still reading), traffic engineers commonly assume that demand for roads will increase at a constant rate, year over year. With that assumption in place, you can see how they could come to the conclusion that a new freeway will improve congestion in the long term. The market movement without induced demand is illustrated below.

The conclusions reached are vastly different. Under these assumptions, after opening the freeway, there is no increase in vehicle miles traveled (which is not corroborated by real-world data.) The reduction of congestion is larger than the induced demand model predicts, and the only growth in demand is independent on roadway growth.

Caveats
The relative sizes of the movements along the curves will vary depending on the slope of the demand curve (which is dependent upon consumer preferences, which vary from place to place). We will examine the variation in the relative effects of induced demand later this week.

Public policy implications
Government-supported roads are effectively subsidies for motorists. Without as much investment in roads, the free market would have a greater incentive to create public transportation and dense housing options in city centers. For this reason, the enemy of the walkable city is the six-lane freeway. As I have argued before (and will no doubt argue again), walkability serves several public policy goals at once.

Bibliographyh/t to Jeff Speck’s Walkable City, where I found much of this information.
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3 Comments

Interesting article but it must be kept in mind the models presented herein are EXTREMELY simplified abstracts of reality…the slope of the demand curve on the first graph is WAY more elastic than it would be in real life thereby lending weight to the authors point of view. Haven’t read the journal article in its entirety yet but even when “induced demand” is accounted for I notice the authors state that expanding road infrastructure is “not without benefit”.

I could be wrong but to me the issue here seems to be “cross price elasticity of demand” for driving in relation to walking which, in layman’s terms, is a ratio calculated by dividing the % change in the qty of miles driven by the % change in the “cost” (time/money saved) of walking…in other words, by how much will miles driven (congestion) fall in relation to the decreased cost of walking – I suspect the ratio would be quite low TBH as for most people in western nations driving from point A to B and avoiding any form of physical activity is a way of life.

As I was writing this, I wasn’t considering the slope of the demand line so much. Since induced demand is a model, I was just trying to show the movement in each of the lines and how the corresponded to changes in price and quantity. I also didn’t worry about the slope too much because different studies have measured several different quantities for the elasticity of demand of auto transportation.

I think you’re right in noting that a reduction in automotive miles traveled by either implementing congestion pricing, closing highways, or hiking gasoline taxes wouldn’t just make people automatically choose to walk or take public transit. Instead, it would reduce mobility, at least in the short term. But the cross price elasticity of demand is a quantity that I would like to examine in the future.